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Employee or Independent Contractor? Implications for the “ABC Test” and Federal Franchise Law Employee or Independent Contractor? Implications for the “ABC Test” and Federal Franchise Law

Employee or Independent Contractor? Implications for the “ABC Test” and Federal Franchise Law

A recent decision by the U.S. District Court for the District of Massachusetts has the potential to impact franchisor-franchisee relationships in other states with laws similar to the Massachusetts Independent Contractor Law (“ICL”) and that may otherwise conflict with the requirements of a specific regulatory scheme. [Patel v. 7-Eleven, Inc., et al., No. 1:17-cv-11414-NMG, 2020 WL 5440623 (D. Mass. Sept. 10, 2020)].
The Court Case
In Patel v. 7-Eleven, franchisees filed a class action alleging that 7-Eleven misclassified them as independent contractors when they were actually employees under the Massachusetts ICL. The Massachusetts ICL [Mass. Gen. Law Ann. Ch. 149, Section 148B(a)] presumes that workers are considered employees of an employer and are not independent contractors, unless the employer can demonstrate each of the following three elements are satisfied (“ABC Test”):
  1. The individual is free from control and direction in connection with the performance of the service, both contractually and in fact;
  2. The service is performed outside the usual course of the business of the employer; and
  3. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
According to the franchisees, 7-Eleven exerted “significant control” over them under their franchise agreement and when the franchisees performed “services” for 7-Eleven. In support of their argument, franchisees provided a laundry list of examples describing when 7-Eleven exercised control both in the Franchise Agreement and in daily operations.
7-Eleven petitioned for summary judgment on the premise that the Federal Trade Commission’s Franchise Rule (“FTC Franchise Rule”) [16 C.F.R. § 436.1] and the Lanham Act [15 U.S.C. § 1127] make it impossible to satisfy the ABC Test since there is a required level of control under the FTC Franchise Rule that is in direct conflict with the first prong of the ICL test. The franchisees argued that the courts routinely apply the ABC Test to franchisors and that 7-Eleven incorrectly interpreted the ICL’s first prong as requiring individuals to be completely free from franchisor control to qualify as an independent contractor when making its preemption argument.  
The Court’s Decision
The court acknowledged that by definition in the FTC Franchise Rule, a franchise requires a franchisor will exert or, has the authority to exert, a significant amount of control over the franchisee’s methods of operation or to provide significant assistance in the franchisee’s method of operation. According to the court, this level of control under the FTC Franchise Rule was in direct conflict with the requirement in the first prong of the ICL to classify an individual as an employee unless they are free from control and direction when performing services. 
In granting summary judgment to 7-Eleven, the court relied on a case with a similar conflict between state statute and regulatory law (Monell v. Boston Pads, LLC, 31 N.E.3d 60 (Mass, 2015)). In Monell, the Massachusetts Supreme Judicial Court concluded that when there is an inherent conflict between a regulation that makes it impossible to satisfy a prong of the ICL, the specific regulatory scheme is controlling over the ICL. In Patel, the court also found that the franchise-specific regulatory provisions of the FTC govern over the more general independent contractor test of the ICL. 
The Patel court held the franchisees’ first argument, i.e., that the courts routinely applied the ABC test to franchisors, was not persuasive because the cited cases either predated Monell or incorrectly applied laws outside of Massachusetts that were not subject to Monell. Further, the court held franchisees’ second argument, i.e., that 7-Eleven’s preemption theory required an individual to be entirely free from control to be an independent contractor, also failed because the FTC Franchise Rule requires more than “some” control and that a franchisor must actually exercise “significant” control in order to comply with the FTC Franchise Rule. 
The Patel court determined that merely qualifying as a franchisee under the FTC Franchise Rule does not automatically make the franchisee an employee for purposes of the ICL. The Patel court reasoned that to do so would effectively “eviscerate the franchise business model” and make those who are subject to the FTC Franchise Rule criminally liable for incorrectly identifying their franchisees as independent contractors. The Patel court emphasized that when this type of conflict exists, the franchise-specific regulatory provisions of the FTC Franchise Rule govern over the more general independent contractor test of the ICL. For these reasons, the Patel court held that the Massachusetts ICL did not apply to 7-Eleven under the circumstances.

Implications for Franchisee-Franchisor Relationships

The 7-Eleven decision is a limited ruling as it only applies to the relationship between the Massachusetts’ ICL and the FTC Franchise Rule. However, it could have potential broader implications for franchisee-franchisor relationships nationwide. Currently, more than 30 states apply some form of the ABC Test for determining independent contractor status. Although not controlling in other jurisdictions, the 7-Eleven decision can certainly be informative when there are challenges in other states to the classification of a franchisee as either an independent contractor or an employee and has been cited in similar cases in California and Illinois.
For more information about this court case or franchise assistance, please contact Christina Fugate, Alice Kelly, Gary Blachman, Paul Brunkhorst, Adam Calisoff, Scott Snively, George Gasper, Jason Torf, or the Ice Miller LLP attorney with whom you work. 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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